Tobacco financiers face increasing reputational and investment risks

Smoking tobacco comes with a high price. Annually more than 7 million people die prematurely from tobacco consumption, with about US$ 2 trillion in healthcare costs and lost productivity. The industry still engages millions of children in child labour and accounts for a significant portion of global deforestation. With such societal damage, the tobacco companies and their financiers are faced with significant reputational and investment risks.

It is estimated that 1.3 million children are involved in some form of labour in the tobacco industry. In Malawi, a major tobacco producing country, among tobacco growing families, 63% of the children are engaged in child labour. British American Tobacco (BAT) and Japan Tobacco International (JTI) source tobacco from Malawi. Both companies consider it “acceptable” for children between 13-15 years old to do work in the tobacco fields as long as local laws do not prevent it. The tobacco industry is also contributing to deforestation, with annually 200,000 hectares of forest cut down for tobacco farming. This accounts for 2-4% of global deforestation and it mainly occurs in developing countries. Tenant families, including children, that grow tobacco, earn as low as US$ 0.3 per kilo of tobacco crop, while tobacco companies are making big profits, with the average operating profit margin for 2017 for the global top-5 tobacco companies reaching 36.3%, according to Bloomberg.

Considering that the tobacco industry is rife with human rights violations and deforestation at the upstream-side and a product at the downstream-side which is costing human lives and causing life-threatening healthcare problems, it is relevant to ask: Who is financing the tobacco supply chain?

In January 2018, Profundo conducted a preliminary scan of the financiers of the top-5 tobacco producers, Altria Group, British American Tobacco, Imperial Brands, Japan Tobacco International and Philip Morris; Among the financiers of the top-5 tobacco companies are large European and US pension funds and insurers, fund managers and leading banks holding US$ 338 billion in shares, US$ 23 billion in bonds and provided US$ 55 billion in outstanding loans. Recently, some of these financiers like ABN Amro, BNP Paribas, APG and Robeco have taken steps to end relations with the top-5 tobacco companies.

Next to these big tobacco companies, there are many other entities in the tobacco supply chain, such as smaller tobacco producers, suppliers to the tobacco industry, supplying anything from paper to machines, and wholesalers and retailers distributing cigarettes, sometimes generating more than 10% of their operating profit from selling cigarettes. These are often financed by banks and investors which already have tobacco exclusion policies. However, these policies are mainly focused on the big top-5 tobacco companies. Recently, some retailers have announced that they will halt cigarettes sales (CVS/Pharmacies in the US, Kruidvat and Lidl Netherlands in Europe).

The companies and financiers active in the supply chain of tobacco do not only face reputational risk, they also face investment risks. Reputation risk might lead to divestments and thereby cause value reductions for bonds and equities, but also the cash flow generation of tobacco-related industries might be affected negatively in the coming years, leading to a strong reduction in the value of their securities. Consequently, the investment risks can be significant.

For more information or to discuss research opportunities on this topic, please contact Alexandra Christopoulou: a.christopoulou@profundo.nl